State proposes giving ENSTAR, not Hilcorp, a lease to store natural gas beneath Kenai

Division of Oil and Gas Director Haley Paine on Tuesday, Oct. 13, proposed giving ENSTAR Natural Gas Co., not Hilcorp, a state lease to store natural gas in the Kenai Loop Gas Field, a significantly depleted reservoir beneath Kenai.

Both companies applied in May for the same reservoir, and the finding says only one operator can feasibly run storage in a single reservoir. In her preliminary finding, Paine concluded that ENSTAR's application more clearly met the state's requirements. Hilcorp's, she found, did not answer the four questions the state used to evaluate the reservoir, including how big it is and how stored gas would be contained.

Gas storage lets companies hold gas produced in summer, when demand is low, and withdraw it in winter, when it's used for heat, the finding says. The state forecasts that Cook Inlet gas production will fall below regional demand in the early 2030s.

The decision is not final. Written comments are due by 5 pm Nov. 13, and only people who comment can later ask the natural resources commissioner to reconsider the final finding.

Why the state favored ENSTAR

ENSTAR proposed a regulated utility facility open to other companies' gas. Hilcorp proposed storing its own gas, in a facility that could someday become a regulated utility. It sought a larger area, about 1,330 acres of state-owned mineral estate to ENSTAR's 500, as Alaska News reported in June.

Hilcorp provided about a quarter of the data and information the state requested, according to the finding. It did not provide maps showing how stored gas would be contained or a model of reservoir pressure during injection and withdrawal. At a Sept. 3 meeting with division staff, the finding says, Hilcorp acknowledged significant uncertainty about where the reservoir was and how far it extended. Its plan called for drilling and testing wells first to confirm the reservoir would work for storage.

"Hilcorp's reliance on exploratory drilling to determine reservoir suitability introduces significant uncertainty and is inconsistent with the immediacy of regional storage needs," Paine wrote.

The companies also disagreed about how much native gas is left in the field. Hilcorp estimated 6.4 billion cubic feet; ENSTAR, 3.9 billion. Paine found ENSTAR's figure, based on a more comprehensive dataset, more reliable.

ENSTAR says it has an agreement to buy the field from AIX Energy, which holds the existing oil and gas lease, subject to conditions and final agreements in the fourth quarter of this year. Hilcorp's application included no such agreement. The finding says only ENSTAR showed it could avoid unreasonable interference with that lease.

At a Sept. 10 legislative hearing, a lawmaker asked Hilcorp's Luke Saugier whether ENSTAR was after the same field. Saugier said Hilcorp had been working with the City of Kenai for more than a year to secure rights to develop storage there. "I guess our view is that that storage facility should be made commercially available to anyone that wants to use it," he said.

What ENSTAR would build

ENSTAR plans to reuse and expand the field's existing pad, add compressors and convert three existing wells to storage, and could later drill up to six more if needed. Under its plan, the field would hold about 20.5 billion cubic feet of working gas, and with all nine wells ENSTAR could inject or withdraw up to 150 million cubic feet a day.

The lease would have an initial 25-year term, with a minimum fee of $10,000 a year plus $5,000 for each added well. Part of the area lies beneath the Kenai Municipal Airport, which the city owns, and the finding directs ENSTAR to negotiate a surface use agreement with the city. ENSTAR would also need approval from the Alaska Oil and Gas Conservation Commission before storing any gas.

Paine also pointed to a January 2024 well problem, described by ENSTAR in legislative testimony, that temporarily reduced CINGSA's withdrawal capacity during a period of high demand. CINGSA, which shares a parent company, TriSummit Utilities, with ENSTAR, is one of the regulated storage facilities in Cook Inlet; Hilcorp operates another.

"This event underscores that reliance on a single major storage facility poses a material risk to system stability," Paine wrote.